Department of the Treasury Contents

Internal Revenue Service Introduction .............................. 1

Chapter

Publication 3991 1. Tax Changes for Individuals ............... 3 (May 2002)

Cat. No. 33967C 2. Tax Changes for Businesses ............... 5

3. IRAs and Other Retirement Plans ........... 8

Highlights of 4. Car Expenses ........................... 9

Supplement to Publication 463 .............. 9

the Job Depreciation of Car ................... 9

Amended Return ..................... 10

Election Not To Claim Special Creation and Allowance ....................... 10

Filled-in Form 2106 ................... 11

Worker 5. Depreciation ............................ 13

Supplement to Publication 946 .............. 13 Assistance Special Depreciation Allowance .......... 13

New York Liberty Zone Benefits .......... 16

Act of 2002 6. How To Get Tax Help ..................... 20

Index .................................... 22

Introduction

All of the changes discussed in this publication resulted

from the Job Creation and Worker Assistance Act of 2002.

This publication highlights tax law changes that took effect

retroactively for 2001 and others that take effect in 2002

and later years. The chapters are divided into separate

sections based on when the changes take effect.

For example, this publication covers the following topics.

• Tax benefits for the area of New York City damaged

in terrorist attacks on September 11, 2001.

• New deduction available for educator expenses.

• Limit on the use of the non-accrual experience

method of accounting.

• Pension changes such as the new tax credit for

certain pension plan startup costs, an increased

SEP contribution limit, figuring 403(b) catch-up contributions, and a provision for deemed IRAs.

• Extension of the welfare-to-work credit and work opportunity credit.

• New 5-year carryback rule for net operating losses

(NOLs).

See the discussion of each topic for more information.

Certain changes had a major effect on two of the publications we issued for 2001. We published supplements to

those two publications and they have been included in this

publication as follows.
Photographs of missing children. The Internal Reve- • Chapter 4 contains the supplement to Publication nue Service is a proud partner with the National Center for 463, Travel, Entertainment, Gift, and Car Expenses. Missing and Exploited Children. Photographs of missing This discusses the increase in the amount of depre- children selected by the Center may appear in this publica- ciation deduction for certain automobiles. tion on pages that would otherwise be blank. You can help

• Chapter 5 contains the supplement to Publication bring these children home by looking at the photographs

946, How To Depreciate Property. This discusses and calling 1–800–THE–LOST (1–800–843–5678) if

the special depreciation allowance for property ac- you recognize a child.

quired after September 10, 2001. Comments and suggestions. We welcome your comments about this publication.

Adjusting your withholding or estimated tax payments You can e-mail us while visiting our web site at

for 2002. If your tax for 2002 will be more or less than your www.irs.gov.

2001 tax, you may need to adjust your withholding or You can write to us at the following address:

estimated tax payments accordingly. If your tax will decrease, you can get the benefit of lower taxes throughout Internal Revenue Service

the year. If you will owe more tax, you can avoid a penalty Technical Publications Branch

when you file your tax return. W:CAR:MP:FP:P

See the following table for forms and publications that 1111 Constitution Ave. NW

will help you adjust your withholding or estimated tax Washington, DC 20224

payments. See chapter 6 for information on ordering forms

and publications. We respond to many letters by telephone. Therefore, it

would be helpful if you would include your daytime phone To adjust your.... Get Form... And Publication... number, including the area code, in your correspondence.

Withholding W–4, Employee’s 919, How Do I

Withholding Adjust My Tax

Allowance Withholding?

Certificate

Estimated tax 1040–ES, 505, Tax

payments Estimated Tax for Withholding and

Individuals Estimated Tax

Page 2
1. 2002 Changes

Tax Changes for Deduction for Educator Expenses

Individuals If you are an eligible educator, you can deduct as an

adjustment to income up to $250 in qualified expenses.

You can deduct these expenses even if you do not itemize

2001 Changes deductions on Schedule A (Form 1040). This adjustment to

income is for expenses paid or incurred in tax years beginning during 2002 or 2003. Previously, these expenses

were deductible only as a miscellaneous itemized deduc- New 5-Year Carryback Rule for tion subject to the 2% of adjusted gross income limit. Net Operating Losses (NOLs)

Eligible educator. You are an eligible educator if, for the If you have an NOL from a tax year ending during 2001 or tax year, you meet the following requirements. 2002, you must generally carry back the entire amount of

the NOL to the 5 tax years before the NOL year (the 1) You are a kindergarten through grade 12:

carryback period). However, you can still choose to use the

previous carryback period. You also can choose not to a) Teacher,

carry back an NOL and only carry it forward. b) Instructor, Individuals, estates, and trusts can file Form 1045, Application for Tentative Refund. c) Counselor, The instructions for this form

will be revised to reflect the new law. d) Principal, or

Wash Sale Rules Do Not Apply to e) Aide.

Section 1256 Contracts 2) You work at least 900 hours during a school year in

a school that provides elementary or secondary edu- The wash sale rules that generally apply to losses from the cation, as determined under state law. sale of stock or securities, do not apply to any loss arising

from a section 1256 contract.

A section 1256 contract is any: Qualified expenses. These are unreimbursed expenses

you paid or incurred for books, supplies, computer equip- • Regulated futures contract, ment (including related software and services), other

• Foreign currency contract, equipment, and supplementary materials that you use in

the classroom. For courses in health and physical educa- • Nonequity option, tion, expenses for supplies are qualified expenses only if

• Dealer equity option, or they are related to athletics.

To be deductible as an adjustment to income, the quali- • Dealer securities futures contract. fied expenses must be more than the following amounts for

the tax year. Wash sales and section 1256 contracts are explained in

detail in Publication 550, Investment Income and Ex- • The interest on qualified U.S. savings bonds that you

penses. excluded from income because you paid qualified

higher education expenses,

Other 2001 Changes • Any distribution from a qualified tuition program that

you excluded from income, or Other changes are discussed in the following chapters.

• Any tax-free withdrawals from your Coverdell educaChapter 4 Car Expenses tion savings account.

Chapter 5 Depreciation

Personal Credits Still Allowed Against

Alternative Minimum Tax

The provision that allowed certain nonrefundable personal

credits to reduce both your regular tax and any alternative

minimum tax (AMT) has been extended and will be in

effect for 2002 and 2003. This provision, as it applies to the

AMT, was originally scheduled to expire after 2001. WithChapter 1 Tax Changes for Individuals Page 3
out the extension, these credits could not have been used amount of earned income for any month that he or she is a

to reduce any AMT in 2002 or 2003. full-time student or not able to care for himself or herself.

Beginning in 2003, this amount is increased to $250 a

month if there is one qualifying person and to $500 a month

Later Change if there are two or more qualifying persons. Before 2003,

the amounts were $200 and $400. The same rule applies

for the exclusion of employer-provided dependent care

benefits. For more information about the credit and exclu- Child and Dependent Care Expenses sion, see Publication 503, Child and Dependent Care Expenses. For the purpose of figuring the child and dependent care

credit, your spouse is treated as having at least a minimum

Page 4 Chapter 1 Tax Changes for Individuals
• An increased section 179 deduction for certain Liberty Zone property. 2. • Extension of the replacement period from 2 years to

5 years for certain property involuntarily converted

Tax Changes for as a result of the terrorist attacks on September 11,

2001, but only if substantially all of the use of the

Businesses replacement property is in New York City. For more

information about involuntary conversions, see Postponement of Gain in Publication 547, Casualties,

Disasters, and Thefts. 2001 Changes

In addition, for 2002 and 2003, the work opportunity

credit is expanded by creating a new targeted group,

New 5-Year Carryback Rule for consisting generally of employees who work in the Liberty

Net Operating Losses (NOLs) Zone or, in certain cases, in New York City outside the

Liberty Zone. For more information, see Work Opportunity

If you have an NOL from a tax year ending during 2001 or Credit Expanded in New York Liberty Zone under 2002

2002, you must generally carry back the entire amount of Changes, later.

the NOL to the 5 tax years before the NOL year (the For more information about the 30% special depreciacarryback period). However, you can still choose to use the tion allowance, Liberty Zone leasehold improvement propprevious carryback period. You also can choose not to erty, or increased section 179 deduction, see New York

carry back an NOL and only carry it forward. Liberty Zone Benefits, in chapter 5. In addition, the tax

Individuals, estates, and trusts can file Form 1045, Appli- benefits for the Liberty Zone will be covered in a new

cation for Tentative Refund. Corporations can file Form edition of Publication 954, Tax Incentives for Empower1139, Corporation Application for Tentative Refund. The ment Zones and Other Distressed Communities, available

instructions for these forms will be revised to reflect the later in 2002.

new law.

Other 2001 Changes Electronic Form 1099

Other changes are discussed in the following chapters.

For tax years ending after March 9, 2002, most Forms

1099 can be furnished electronically if the recipient con- Chapter 4 Car Expenses

sents, according to IRS regulations, to receive it that way. Chapter 5 Depreciation

Tax Incentives for

New York Liberty Zone 2002 Changes

New tax benefits are provided for the parts of New York

City damaged in the terrorist attacks on September 11,

2001. These benefits apply to the newly created New York Nonaccrual-Experience Method

Liberty Zone, which is the area located on or south of

Canal Street, East Broadway (east of its intersection with Under current law, if you perform services and use an

Canal Street), or Grand Street (east of its intersection with accrual method of accounting, you do not accrue income

East Broadway), in the Borough of Manhattan. which, based on experience, you expect to be uncollectiTax benefits for the New York Liberty Zone include the ble. Beginning in 2002, this rule only applies if you perform

services in the fields of health, law, engineering, architec- following. ture, accounting, actuarial science, performing arts, and

• A special depreciation allowance equal to 30% of the consulting, or your average annual gross receipts for the 3

adjusted basis of qualified Liberty Zone property. It is prior tax years does not exceed $5,000,000. As under

allowed for the year the property is placed in service. current law, the nonaccrual-experience method will not

apply to amounts on which you charge interest or a late • No alternative minimum tax depreciation adjustment payment penalty. For more information, see for qualified Liberty Zone property. Nonaccrual-Experience Method in chapter 11 of Publica-

• Classification of Liberty Zone leasehold improve- tion 535, Business Expenses.

ment property as 5-year property.

• Authorization of the issuance of tax-exempt New Issuance of Qualified Zone

York Liberty bonds to finance the acquisition, con- Academy Bonds struction, reconstruction, and renovation of nonresidential real property, residential rental property, and State and local governments issue qualified zone acadpublic utility property in the Liberty Zone. emy bonds to raise funds for the use of qualified zone

Chapter 2 Tax Changes for Businesses Page 5
academies. The amount of bonds that may be issued was Work Opportunity Credit Extended limited to $400 million each year for 1998, 1999, 2000, and

2001. This provision has been extended to provide for an The work opportunity credit that was scheduled to expire

additional $400 million of bonds to be issued each year for for wages paid to individuals who began working for you

2002 and 2003. For more information about qualified zone after 2001 has been extended to include wages paid to

academy bonds, see Publication 954, Tax Incentives for qualified individuals who begin work for you in 2002 or

Empowerment Zones and Other Distressed Communities. 2003. For more information about the work opportunity

credit, see Publication 954, Tax Incentives for EmpowerDepletion ment Zones and Other Distressed Communities.

The suspension of the taxable income limit on percentage Electric and Clean-Fuel Vehicles

depletion from the marginal production of oil and natural

gas that was scheduled to expire for tax years beginning The maximum clean-fuel vehicle deduction and qualified

after 2001 has been extended to tax years beginning electric vehicle credit were scheduled to be 25% lower for

before 2004. For more information on marginal production, 2002 and both were scheduled to be phased out comsee section 613A(c) of the Internal Revenue Code. pletely by 2005. The full deduction and credit are now

allowed for qualified property placed in service in 2002 and

Work Opportunity Credit Expanded 2003. The phaseout of the deduction and the credit will

begin in 2004, and no deduction or credit will be allowed for in New York Liberty Zone property placed in service after 2006. For more information

about electric and clean-fuel vehicles, see chapter 12 in The work opportunity credit is expanded to include a new Publication 535, Business Expenses. targeted group consisting generally of employees who

perform substantially all their services:

Renewable Electricity Production • In the New York Liberty Zone (defined earlier under

Tax Incentives for New York Liberty Zone, under Credit

2001 Changes), or The renewable electricity production credit is extended to

• Elsewhere in New York City for a business that relo- include electricity produced by facilities placed in service

cated from the Liberty Zone due to the destruction or after 2001 and before 2004.

damage of its place of business by the September

11, 2001, terrorist attack.

The credit is available to employers for wages paid to new Later Changes employees and existing employees for work performed

during 2002 or 2003. Certain limits apply. For more information about the work opportunity credit, see Publication Special Depreciation Allowance 954, Tax Incentives for Empowerment Zones and Other

Distressed Communities. You can claim the special depreciation allowance (an additional 30% depreciation deduction) for new property that

you acquire before September 11, 2004, and place in Credit For Pension Plan Startup Costs service for your business generally before January 1,

2005, if you meet the other requirements for qualified The credit for pension plan startup costs is now allowed for property covered in chapter 5. Accordingly, you will gener- plans that become effective after December 31, 2001. ally no longer be able to claim the special depreciation Previously, the credit was only allowed for plans estaballowance for the qualified property if you acquire it after lished after December 31, 2001. For more information on September 10, 2004, or place it in service for your busi- the credit, see Important Changes for 2002 in Publication

ness after December 31, 2004. However, you will be able 560, Retirement Plans for Small Business. to claim the special Liberty Zone depreciation allowance

(an additional 30% depreciation deduction) for most quali- Welfare-to-Work Credit Extended fied property if you place it in service in the Liberty Zone

after December 31, 2004, and generally before January 1, The welfare-to-work credit that was scheduled to expire for 2007, provided you meet the other requirements for quali- wages paid to individuals who began working for you after fied Liberty Zone property covered in chapter 5. 2001 has been extended to include wages paid to qualified

individuals who begin work for you in 2002 or 2003. For

more information on the welfare-to-work credit, see Publi- Extension of Placed in Service Date

cation 954, Tax Incentives for Empowerment Zones and

Other Distressed Communities. To qualify for the special depreciation allowance, your

property must meet certain tests, including the placed in

service date test, as well as the other requirements covered in chapter 5 of this publication. To meet the placed in

service date test, your property must generally be placed in

Page 6 Chapter 2 Tax Changes for Businesses
service for use in your trade or business or for the produc- property that you acquire after September 10, 2001, if the

tion of income after September 10, 2001, and before Janu- property meets the requirements listed under Qualified

ary 1, 2005. However, certain property placed in service Liberty Zone Property in chapter 5 of this publication. You

before January 1, 2006, may meet this test. Transportation will be able to claim the allowance for both new and used

property and property with a recovery period of 10 years or property that you acquire after September 10, 2004, pro- longer meet the test if one of the following applies. vided the property meets the other requirements for quali-

• The property has an estimated production period of fied Liberty Zone property.

more than 2 years.

• The property has an estimated production period of Depreciation of Property

more than 1 year and it costs more than $1 million. Used on Indian Reservations

Transportation property is any tangible personal prop- The special depreciation rules that apply to qualified property used in the trade or business of transporting persons erty used on an Indian reservation were scheduled to

or property. expire for property placed in service after 2003. These

For property that qualifies for the special depreciation special rules have been extended to include property

allowance solely because of the one-year extension of the placed in service in 2004. For more information about

placed in service date, only the part of the basis attributa- these rules, see Publication 946, How To Depreciate Propble to manufacture, construction, or production before erty.

September 11, 2004, is eligible for the special depreciation

allowance. Indian Employment Credit Extended

Special Liberty Zone Depreciation The Indian employment credit that was scheduled to expire

Allowance for New and Used Property for tax years beginning after 2003 has been extended to

include a tax year beginning in 2004. For more information

You can claim the special Liberty Zone depreciation allow- about this credit, see Publication 954, Tax Incentives for

ance (an additional 30% depreciation deduction) for used Empowerment Zones and Other Distressed Communities.

Chapter 2 Tax Changes for Businesses Page 7
tions, the portion of the distribution that is rolled over is

treated as consisting first of pre-tax amounts (contributions 3. and earnings that would be includible in income if no

rollover occurred). This means that if you roll over an

amount that is at least as much as the pre-tax portion of the IRAs and Other distribution, you do not have to include any of the distribution in income. Retirement Plans

Years of service for church employees and ministers.

If you are a minister or church employee, treat all of your

2002 Changes years of service as an employee of a church or a convention or association of churches as years of service with one

employer. Prior law required church employees and minisSimplified Employee Pensions (SEPs) ters to figure years of service separately for each employer.

Contribution limit increased. For plan years beginning As a minister or church employee, all contributions made

after December 31, 2001, the annual limit on the amount of to 403(b) plans on your behalf, as an employee of a church

employer contributions to a SEP increases to the lesser of or a convention or association of churches, are considered

the following amounts. made by one employer.

• 25% of an eligible employee’s compensation. Foreign missionaries. If you are a foreign missionary,

• $40,000 (subject to cost-of-living adjustments after contributions to your 403(b) account will not be treated as

2002). exceeding the limit on annual additions if the contributions

are not more than the greater of:

Deduction limit. For years beginning after 2001, the fol- • $3,000, or lowing changes apply to the SEP deduction limit.

• Your includible compensation. Elective deferrals (SARSEPs). Elective deferrals

under a SARSEP are not subject to the deduction limit that

applies to employer contributions. Also, elective deferrals More information. For more information about 403(b)

are not taken into account when figuring the amount you plans, see Publication 571, Tax-Sheltered Annuity Plans

can deduct for employer contributions that are not elective (403(b) Plans).

deferrals.

Definition of compensation. Compensation for figuring the deduction for employer contributions includes elec- Later Change tive deferrals under a SARSEP.

More information. For more information about SEPs, see Deemed IRAs Publication 560, Retirement Plans for Small Business.

For plan years beginning after 2002, a qualified employer

403(b) Plans plan can provide for voluntary employee contributions to a

separate account or annuity that is deemed to be an IRA.

Figuring catch-up contributions. When figuring allowa- For this purpose, a qualified employer plan includes a

ble catch-up contributions, combine all contributions made deferred compensation plan (section 457(b) plan) mainby your employer on your behalf to the following plans. tained by a state, a political subdivision of a state, or an

agency or instrumentality of a state or political subdivision • Qualified retirement plans. of a state.

• 403(b) plans. The term qualified employer plan also includes:

• Simplified employee pensions (SEP). • A qualified pension, profit-sharing, or stock bonus

• SIMPLE plans. plan (section 401(a) plan),

• A qualified employee annuity plan (section 403(a) The total amount of the catch-up contributions to all plan), and plans maintained by your employer cannot exceed the

annual limit. For 2002, the limit is $1,000. • A tax-sheltered annuity plan (section 403(b) plan).

Rollovers to and from 403(b) plans. If a distribution More information about IRAs can be found in Publication

includes both pre-tax contributions and after-tax contribu- 590, Individual Retirement Arrangements (IRAs).

Page 8 Chapter 3 IRAs and Other Retirement Plans
Special Depreciation Allowance

4. The new law allows you to claim a special depreciation

allowance. This special allowance is a deduction equal to

Car Expenses 30% of the depreciable basis of qualified property. You

figure the amount of the special depreciation allowance

after any section 179 deduction you choose to claim, but

before figuring your regular depreciation deduction under If you purchased a car after September 10, 2001, for use in the Modified Accelerated Cost Recovery System your business (or as an employee) and figure your deducti- (MACRS). See Depreciation Deduction under Actual Car ble expenses using the actual car expense method, new Expenses in chapter 4 of Publication 463 for information law contains provisions that may affect your depreciation about MACRS. deduction for that car.

Publication 463, Travel, Entertainment, Gift, and Car You can claim the special depreciation allowance only

Expenses, for the year the qualified property is placed in service. contains information on figuring depreciation on

your car. However, Publication 463 does not contain the

new provisions because it was printed before the law was Qualified property. Qualified property includes a car (any

enacted. The new provisions are in the Supplement to four-wheeled vehicle, including a truck or van not more

Publication 463, which is reprinted below. than 6,000 pounds, that is made primarily for use on public

streets, roads, and highways) that meets all of the following requirements. Supplement to Publication 463

1) You bought it new. Travel, Entertainment, Gift, and 2) You bought it after September 10, 2001. (But a car is

Car Expenses not qualified property if a binding written contract for

you to buy the car was in effect before September

11, 2001.)

3) You began using it for business after September 10,

2001, and used it more than 50% in a qualified business use. Introduction

This supplemental publication is for taxpayers who pur- Example. Bob bought a new car on October 15, 2001, chased a car for business purposes after September 10,

2001, and figure their deductible expenses, including a for $20,000 and placed it in service immediately, using it

deduction for depreciation, using the actual car expense 75% for business. Bob’s car is qualified property.

method. Bob chooses not to take a section 179 deduction for the

After Publication 463 was printed, the Job Creation and car. He does claim the new special depreciation allowWorker Assistance Act of 2002 was signed into law by the ance. Bob first must figure the car’s depreciable basis,

President. Certain provisions of this new law may reduce which is $15,000 ($20,000 × .75). He then figures the

your taxes for 2001. The new law contains the following special depreciation allowance of $4,500 ($15,000 × .30).

provisions. The remaining depreciable basis of $10,500 ($15,000 −

$4,500) is depreciated using MACRS (200% declining 1) A new depreciation deduction, the special deprecia- balance method, half-year convention) and results in a tion allowance. deduction of $2,100 ($10,500 × .20), for a total deprecia2) An increase in the limit on depreciation for any car tion deduction for 2001 of $6,600 ($4,500 + $2,100). Howfor which you claim the new special depreciation ever, Bob’s depreciation deduction is limited to $5,745

allowance. ($7,660 × .75), as discussed next.

If you have already filed your 2001 return, you may wish

to file an amended return to claim any of these benefits. Depreciation Limit

See Amended Return, later.

The limit on your depreciation deduction for 2001 is increased to $7,660 for a car that is qualified property (deDepreciation of Car fined above) and for which you claim the special

depreciation allowance. The limit is increased to $23,080 if

the car is an electric car. The section 179 deduction is If you used the actual car expense method to figure your treated as depreciation for purposes of this limit. deduction for a car you own and use in your business (or

as an employee), you generally can claim a depreciation If you use a car less than 100% in your business or

deduction. However, there is a limit on the depreciation work, the limit is $7,660 (or $23,080 for an electric car)

deduction you can take for your car each year. See Depre- multiplied by the percentage of business and investment

ciation Limit later. use during the year.

Chapter 4 Car Expenses Page 9
 For cars that do not qualify for (or for which you choose

not to claim) the special depreciation allowance, the limit

remains $3,060 ($9,280 for electric cars). Election Not To Claim

Special Allowance

Amended Return You can elect not to claim the special depreciation allowance for a car by making a statement attached to, or written

If you filed your 2001 calendar year return before June 1, on, your return indicating that you are electing not to claim

2002, and did not claim the new special depreciation allow- the special depreciation allowance for 5-year property. As

ance for a qualified car, you can claim it by filing an a general rule, you must make this election by the due date

amended return on Form 1040X, Amended U.S. Individual (including extensions) of your return.

Income Tax Return, by April 15, 2003. At the top of the You can have an automatic extension of 6 months from

Form 1040X, print “Filed pursuant to Revenue Procedure the due date of your return (excluding extensions) to make 2002–33.” If you are an employee, attach Form 2106, the election with an amended return. To get this extension, Employee Business Expenses (revised March 2002). If you must have filed your original return by the due date you are self-employed, attach Form 4562, Depreciation (including extensions). At the top of the statement, print and Amortization (revised March 2002). “Filed pursuant to section 301.9100–2.” Or, you can claim the special depreciation allowance by If you elect not to claim the special depreciation allow- filing Form 3115, Application for Change in Accounting

Method, ance for a car, you cannot claim it for any other 5-year with your 2002 return. For details, see Revenue property placed in service during the same year. Procedure 2002–33. (But, filing Form 1040X for 2001

enables you to claim the special allowance earlier than Unless you elect (or are treated as electing) not to claim

attaching Form 3115 to your 2002 return.) the special depreciation allowance, you must reduce the

You cannot claim the special depreciation allowance on car’s adjusted basis by the amount of the allowance, even

an amended return (or by using Form 3115) if you made, or if the allowance was not claimed.

are treated as having made, the election not to claim it

described later. Deemed election for return filed before June 1, 2002. If

you did not make the election not to claim the special Example. The facts are the same as in the previous depreciation allowance in the time and manner described example except that Bob filed his original 2001 income tax above, you will still be treated as electing not to claim it if all return on April 15, 2002, and claimed a $3,000 ($20,000 x of the following apply. .75 x .20) depreciation deduction for his new car using

MACRS. 1) You filed your 2001 return before June 1, 2002. Bob now wishes to claim the special depreciation allowance for his new car on an amended 2001 return. Bob, who 2) You claimed depreciation on your return but did not

is an employee, files Form 1040X, by April 15, 2003, with claim the special depreciation allowance.

an updated Form 2106 (revised March 2002) attached, 3) You did not file an amended 2001 return by April 15, increasing his total depreciation deduction to $5,745, as 2003, or a Form 3115 with your 2002 return, to claim figured in the earlier example. the special depreciation allowance. Bob’s new filled-in Form 2106 is shown later.

Page 10 Chapter 4 Car Expenses
OMB No. 1545-0139 Employee Business Expenses Form 2106

 See separate instructions.

Department of the Treasury

Internal Revenue Service  Attach to Form 1040.

Attachment

Sequence No. 54

Your name Occupation in which you incurred expenses Social security number

Employee Business Expenses and Reimbursements

Column A Column B

Step 1 Enter Your Expenses Meals and

Entertainment

Other Than Meals

and Entertainment

1

Vehicle expense from line 22 or line 29. (Rural mail carriers: See

instructions.)

1

2

Parking fees, tolls, and transportation, including train, bus, etc., that

did not involve overnight travel or commuting to and from work

2

Travel expense while away from home overnight, including lodging,

airplane, car rental, etc. Do not include meals and entertainment

3

3

Business expenses not included on lines 1 through 3. Do not

include meals and entertainment

4

4

5 Meals and entertainment expenses (see instructions) 5

Total expenses. In Column A, add lines 1 through 4 and enter the

result. In Column B, enter the amount from line 5

6

6

Note: If you were not reimbursed for any expenses in Step 1, skip line 7 and enter the amount from line 6 on line 8.

Step 2 Enter Reimbursements Received From Your Employer for Expenses Listed in Step 1

Enter reimbursements received from your employer that were not

reported to you in box 1 of Form W-2. Include any reimbursements

reported under code “L” in box 12 of your Form W-2 (see

instructions)

7

7

Step 3 Figure Expenses To Deduct on Schedule A (Form 1040)

8

Subtract line 7 from line 6. If zero or less, enter -0-. However, if

line 7 is greater than line 6 in Column A, report the excess as

income on Form 1040, line 7

8

Note: If both columns of line 8 are zero, you cannot deduct

employee business expenses. Stop here and attach Form

2106 to your return.

9

9

10

In Column A, enter the amount from line 8. In Column B, multiply

line 8 by 50% (.50). (Employees subject to Department of

Transportation (DOT) hours of service limits: Multiply meal

expenses by 60% (.60) instead of 50%. For details, see

instructions.)

Add the amounts on line 9 of both columns and enter the total here. Also, enter the total on

Schedule A (Form 1040), line 20. (Fee-basis state or local government officials, qualified

performing artists, and individuals with disabilities: See the instructions for special rules on

where to enter the total.)  10

For Paperwork Reduction Act Notice, see instructions. Cat. No. 11700N Form 2106 (2001) (Rev. 3-2002)

Part I

(99)

(Rev. March 2002) 2001

Election Pursuant to Notice 2001-70

Bob Smith 555 00 0000

6,233

150

6,383

450

5,933

5,933

5,933

Sales

Chapter 4 Car Expenses Page 11
Form 2106 (2001) (Rev. 3-2002) Page 2

Vehicle Expenses

Section A—General Information (You must complete this section if you

are claiming vehicle expenses.) (a) Vehicle 1 (b) Vehicle 2

11 Enter the date the vehicle was placed in service 11 / /

12 Total miles the vehicle was driven during 2001 12 miles miles

13 Business miles included on line 12 13 miles miles

14 Percent of business use. Divide line 13 by line 12 14 % %

15 Average daily roundtrip commuting distance 15 miles miles

16 Commuting miles included on line 12 16 miles miles

17 Other miles. Add lines 13 and 16 and subtract the total from line 12 17 miles miles

18 Do you (or your spouse) have another vehicle available for personal use? Yes No

19 Was your vehicle available for personal use during off-duty hours? Yes No

Yes No

21 If “Yes,” is the evidence written? Yes No

20 Do you have evidence to support your deduction?

Section B—Standard Mileage Rate (See the instructions for Part II to find out whether to complete this section or

Section C.)

22 Multiply line 13 by 341⁄2¢ (.345) 22

Section C—Actual Expenses (a) Vehicle 1 (b) Vehicle 2

Gasoline, oil, repairs, vehicle

insurance, etc.

23

23

24a Vehicle rentals 24a

b Inclusion amount (see instructions) 24b

c Subtract line 24b from line 24a 24c

Value of employer-provided

vehicle (applies only if 100% of

annual lease value was included

on Form W-2—see instructions)

25

25

26 Add lines 23, 24c, and 25 26

Multiply line 26 by the

percentage on line 14

27

27

28

Depreciation. Enter amount

from line 38 below

28

29 Add lines 27 and 28. Enter total

here and on line 1 29

Section D—Depreciation of Vehicles (Use this section only if you owned the vehicle and are completing Section C

for the vehicle.)

(a) Vehicle 1 (b) Vehicle 2

Enter cost or other basis (see

instructions)

30

30

Enter section 179 deduction

and special allowance (see

instructions)

31

31

Multiply line 30 by line 14 (see

instructions if you claimed the

section 179 deduction or special

allowance) 

32

32

Enter depreciation method and

percentage (see instructions)

33

33

Multiply line 32 by the percentage

on line 33 (see instructions)

34

34

35 Add lines 31 and 34 35

Enter the limit from the table in

the line 36 instructions

36

36

Multiply line 36 by the

percentage on line 14

37

37

Enter the smaller of line 35 or

line 37. Also enter this amount

on line 28 above

38

38

Part II

/ /

Form 2106 (2001) (Rev. 3-2002)

4,200

10 15 2001

75

10

500

500

3,150

650

650

488

5,745

6,233

20,000

4,500

10,500

200 DB

7,660

2,100

6,600

5,745

5,745

20%









Page 12 Chapter 4 Car Expenses
mental publication explains how to claim these benefits

and how to elect not to claim the special depreciation 5. allowance or special Liberty Zone depreciation allowance.

See Table 2 at the end of the supplement for an overview

of the rules that apply if you filed your return before June 1, Depreciation 2002.

If you depreciate business property that you acquired and Special Depreciation placed in service after September 10, 2001, new law contains provisions that may affect your depreciation deduc- Allowance

tion for that property.

Publication 946, How To Depreciate Property, contains You can take a special depreciation allowance for qualified

information on depreciation. However, Publication 946 property you place in service after September 10, 2001. does not contain the new provisions because it was printed The allowance is an additional deduction of 30% of the

before the law was enacted. The new provisions are in the property’s depreciable basis. To figure the depreciable Supplement to Publication 946, which is reprinted below. basis, you must first multiply the property’s cost or other

basis by the percentage of business/investment use and

Supplement to Publication 946 then reduce that amount by any section 179 deduction and

certain other deductions and credits for the property. See

How To Depreciate Property What Is the Basis for Depreciation? on page 23 in Publication 946 for more information on figuring depreciable basis.

The allowance is deductible for both regular tax and

alternative minimum tax (AMT) purposes. There is no AMT

adjustment required for any depreciation figured on the

remaining basis of the property. In the year you claim the Introduction allowance (generally the year you place the property in

After Publication 946 was printed, the Job Creation and service), you must reduce the depreciable basis of the

Worker Assistance Act of 2002 was signed into law by the property by the allowance before figuring your regular

President. The new law made several changes in the tax depreciation deduction.

rules explained in the publication. Some of the changes

apply to property placed in service during 2001. This sup- Example 1. On November 1, 2001, you bought and

plemental publication describes those changes and ex- placed in service in your business qualified property that

plains what you should do if you are affected by them. cost $100,000. You did not elect to claim a section 179

The situations and examples in Publication 946 do not deduction. You can deduct 30% of the cost ($30,000) as a

reflect any of the changes made by the Job Creation and special depreciation allowance for 2001. You use the reWorker Assistance Act of 2002. maining $70,000 of cost to figure your regular depreciation

The new law contains the following provisions. deduction for 2001 and later years.

• 30% depreciation deductions (special depreciation Example 2. The facts are the same as in Example 1, allowance and special New York Liberty Zone (Lib- except that you choose to deduct $24,000 of the property’s

erty Zone) depreciation allowance) for the year quali- cost as a section 179 deduction. You use the remaining fied property is placed in service after September 10, $76,000 of cost to figure your special depreciation allow- 2001. ance of $22,800 ($76,000 × 30%). You use the remaining

• An increased dollar limit on the section 179 deduc- $53,200 of cost to figure your regular depreciation deduction for qualified Liberty Zone property purchased tion for 2001 and later years.

after September 10, 2001.

• A shorter recovery period for qualified Liberty Zone Qualified Property

leasehold improvement property placed in service To qualify for the special depreciation allowance, your after September 10, 2001. property must meet the following requirements. • An increase in the maximum depreciation deduction

for 2001 for a qualified passenger automobile placed 1) It is new property of one of the following types.

in service after September 10, 2001. a) Property depreciated under the modified accelerated cost recovery system (MACRS) with a recov- If you believe you qualify for an increased deduction

under any of these new rules, you must file the revised ery period of 20 years or less. See Can You Use

2001 Form 4562 (dated March 2002) for 2001 calendar or MACRS To Depreciate Your Property and Which

fiscal years and 2000 fiscal years ending after September Recovery Period Applies? on pages 7 and 23,

10, 2001. If you have already filed a tax return, this supple- respectively, in Publication 946.

Chapter 5 Depreciation Page 13
b) Water utility property. See 25-year property on • An executor and a beneficiary of the same estate.

page 22 in Publication 946.

c) Computer software that is not a section 197 intan- Tests To Be Met

gible as described in Computer software on page

5 in Publication 946. (The cost of some computer To qualify for the special depreciation allowance, the propsoftware is treated as part of the cost of hardware erty must meet all of the following tests.

and is depreciated under MACRS.) Acquisition date test. Generally, you must have acd) Qualified leasehold improvement property (de- quired the property either:

fined later). • After September 10, 2001, and before September

11, 2004, but only if no written binding contract for 2) It meets the following tests (explained later under the acquisition was in effect before September 11, Tests To Be Met). 2001, or

a) Acquisition date test. • Pursuant to a written binding contract entered into

b) Placed in service date test. after September 10, 2001, and before September

11, 2004. c) Original use test.

Property you manufacture, construct, or produce for 3) It is not excepted property (explained later under your own use meets this test if you began the manufacture, Excepted Property). construction, or production of the property after September

10, 2001, and before September 11, 2004.

Qualified leasehold improvement property. Generally, Placed in service date test. Generally, the property must this is any improvement to an interior part of a building that be placed in service for use in your trade or business or for is nonresidential real property, provided all of the following the production of income after September 10, 2001, and requirements are met. before January 1, 2005.

• The improvement is made under or pursuant to a If you sold property you placed in service after Septemlease by the lessee (or any sublessee) or the lessor ber 10, 2001, and you leased it back within 3 months after

of that part of the building. the property was originally placed in service, the property

is treated as placed in service no earlier than the date it is • That part of the building is to be occupied exclusively used under the leaseback. by the lessee (or any sublessee) of that part.

• The improvement is placed in service more than 3 Original use test. The original use of the property must

years after the date the building was first placed in have begun with you after September 10, 2001. “Original

service. use” means the first use to which the property is put,

whether or not by you. Additional capital expenditures you

However, a qualified leasehold improvement does not incurred after September 10, 2001, to recondition or rebuild your property meet the original use test. include any improvement for which the expenditure is

attributable to any of the following.

• The enlargement of the building. Excepted Property

• Any elevator or escalator. The following property does not qualify for the special

depreciation allowance. • Any structural component benefiting a common

area. • Property used by any person before September 11,

2001. • The internal structural framework of the building.

• Property required to be depreciated using ADS. This

Generally, a binding commitment to enter into a lease is includes listed property used 50% or less in a qualitreated as a lease and the parties to the commitment are fied business use.

treated as the lessor and lessee. However, a binding • Qualified New York Liberty Zone leasehold improve- commitment between related persons is not treated as a ment property (defined next). lease.

Related persons. For this purpose, the following are Qualified New York Liberty Zone leasehold improve- related persons. ment property. This is any qualified leasehold improve-

• Members of an affiliated group. ment property (as defined earlier) if all of the following

requirements are met. • The persons listed in items (1) through (9) under

Related persons on page 8 of Publication 946 (ex- • The improvement is to a building located in the New

cept that “80% or more” should be substituted for York Liberty Zone (defined later under New York

“more than 10%” each place it appears). Liberty Zone Benefits).

Page 14 Chapter 5 Depreciation
• The improvement is placed in service after Septem- the completed Form 3115 with the IRS National Ofber 10, 2001, and before January 1, 2007. fice no later than when you file the original with your

return. For more information about filing Form 3115, • No written binding contract for the improvement was including the address to send it to, see Revenue in effect before September 11, 2001. Procedure 2002–9, Revenue Procedure 2002–19,

and Revenue Procedure 2002–33.

Election Not To Claim the Allowance

Example 1. You are an individual and you use the

You can elect not to claim the special depreciation allow- calendar year. You placed qualified property in service for

ance for qualified property. If you make this election for any your business in December 2001. You filed your 2001

property, it applies to all property in the same property income tax return before April 15, 2002. You did not claim

class placed in service during the year. To make this the special depreciation allowance for the property and did

election, attach a statement to your return indicating you not make the election not to claim the allowance. You can

elect not to claim the allowance and the class of property claim the special allowance by filing an amended 2001

for which you are making the election. return by April 15, 2003, with “Filed Pursuant to Rev. Proc.

2002–33” at the top of the amended return. You must file

When to make election. Generally, you must make the an amended return by April 15, 2003, even if you get an

election on a timely filed tax return (including extensions) extension of time to file your 2002 tax return. for the year in which you place the property in service.

However, if you timely filed your return for the year Example 2. The facts concerning your 2001 return are

without making the election, you can still make the election the same as in Example 1. In addition, you got an auto- by filing an amended return within 6 months of the due date matic 4-month extension of time (to August 15, 2003) to file of the original return (not including extensions). Attach the your 2002 return. You can claim the special allowance by election statement to the amended return. At the top of the filing a Form 3115 (with “Filed Pursuant to Rev. Proc.

election statement, write “Filed pursuant to section 2002–33” on the appropriate line) with your 2002 return by 301.9100–2.” August 15, 2003. You must also file a copy of this Form

3115 with the IRS National Office no later than when you Revoking an election. Once you elect not to deduct the file your 2002 return. special depreciation allowance for a class of property, you

cannot revoke the election without IRS consent. A request Electing not to claim the allowance. Generally, you to revoke the election is subject to a user fee. have elected not to claim the special depreciation allowance for a class of property if you:

Rules for Returns Filed Before • Filed your return timely (including extensions) for the June 1, 2002 year you placed qualified property in service and

indicated on a statement with the return that you are The following rules apply if you placed qualified property in not claiming the allowance, or service after September 10, 2001, and filed your return

before June 1, 2002. The rules apply to returns for the • Filed your return timely and filed an amended return

following years. within 6 months of the due date of the original return

(not including extensions) and indicated on a state- • 2000 fiscal years that end after September 10, 2001. ment with the amended return that you are not • 2001 calendar and fiscal years. claiming the allowance.

The statement must indicate that you are not deducting the

Claiming the allowance. If you did not claim the allow- special depreciation allowance and the class of property to

ance on your return and did not make the election not to which the election applies. The statement can be either

claim the allowance, you can do either of the following to attached to or written on the return. You can, for example, claim the allowance. write “not deducting 30%” on Form 4562.

• File an amended return by the due date (not includ- Deemed election. If you have not followed either of the ing extensions) of your return for the year following procedures described above to elect not to claim the

the year the property was placed in service. Write allowance, you may still be treated as making the election. “Filed Pursuant to Rev. Proc. 2002–33” at the top of You will be treated as making the election if you meet both the amended return. of the following conditions.

• File Form 3115, Application for Change in Account- • You filed your return for the year you placed the ing Method, with your return for the year following property in service and claimed depreciation, but not the year the property was placed in service. Your the special allowance, for any class of property. return must be filed by the due date (including extensions). Write “Automatic Change Filed Under Rev. • You do not file an amended return or a Form 3115

Proc. 2002–33” on the appropriate line of Form within the time prescribed for claiming the special

3115. You must also file a copy (with signature) of allowance. See Claiming the allowance, earlier.

Chapter 5 Depreciation Page 15
Passenger Automobiles Publication 946 for more information on figuring depreciable basis.

The limit on your depreciation deduction (including any The allowance is deductible for both regular tax and

section 179 deduction) for any passenger automobile that alternative minimum tax (AMT) purposes. There is no AMT

is qualified property (defined earlier) placed in service after adjustment required for any depreciation figured on the

September 10, 2001, and for which you claim the special remaining basis of the property. In the year you claim the

depreciation allowance is increased. Generally, the limit is allowance (generally the year you place the property in

increased from $3,060 to $7,660. However, if the automo- service), you must reduce the depreciable basis of the

bile is a qualified electric car, the limit is increased from property by the allowance before figuring your regular

$9,280 to $23,080 ($22,980 if placed in service in 2002). depreciation deduction.

Table 1 shows the maximum deduction amounts for 2001. You cannot claim the special Liberty Zone depreciation allowance for property eligible for the spe- Table 1. Maximum Deduction for 2001 CAUTION cial depreciation allowance explained earlier in

!

Qualified Property under Special Depreciation Allowance. Placed in Placed in Qualified Qualified property is eligible for only one special deprecia- Service Before Service After Vehicle tion allowance. Sept. 11 Sept. 10

Passenger $3,060 $ 7,660 Example 1. On November 1, 2001, you bought and automobile placed in service in your business, which is in the Liberty

Electric car 9,280 23,0801 Zone, qualified Liberty Zone property that cost $200,000.

1 You did not elect to claim a section 179 deduction. You can $22,980 if you place an electric car in service in 2002. deduct 30% of the cost ($60,000) as a special Liberty Zone

depreciation allowance for 2001. You use the remaining

$140,000 of cost to figure your regular depreciation deduc- Election not to claim the allowance. The increased tion for 2001 and later years. maximum depreciation deduction does not apply if you

elected not to claim the special depreciation allowance as Example 2. The facts are the same as in Example 1, explained earlier under Election Not To Claim the Allow- except that you choose to deduct $59,000 of the property’s

ance and Rules for Returns Filed Before June 1, 2002. cost as a section 179 deduction. (See Increased Section

179 Deduction, later, for information concerning how this

section 179 deduction amount is figured). You use the New York Liberty Zone remaining $141,000 of cost to figure your special Liberty

Zone depreciation allowance of $42,300 ($141,000 × Benefits 30%). You use the remaining $98,700 of cost to figure your

regular depreciation deduction for 2001 and later years. Several benefits are available for property you place in

service in the New York Liberty Zone (Liberty Zone). They

include a special depreciation allowance for the year you Qualified Liberty Zone Property

place the property in service, an increased section 179 For a 2001 calendar or fiscal year and a 2000 fiscal year deduction, and the classification of certain leasehold im- that ends after September 10, 2001, property qualifies for provement property as 5-year property. the special Liberty Zone depreciation allowance if it meets

the following requirements. Area defined. The New York Liberty Zone is the area

located on or south of Canal Street, East Broadway (east 1) It is one of the following types of property. of its intersection with Canal Street), or Grand Street (east

of its intersection with East Broadway) in the Borough of a) Used property depreciated under MACRS with a

Manhattan in the City of New York, New York. recovery period of 20 years or less. See Can You

Use MACRS To Depreciate Your Property and

Special Liberty Zone Depreciation Which Recovery Period Applies? on pages 7 and

23, respectively, in Publication 946. Allowance

b) Used water utility property. See 25-year property

You can take a special depreciation allowance for qualified on page 22 in Publication 946.

Liberty Zone property you place in service after September c) Used computer software that is not a section 197 10, 2001. The allowance is an additional deduction of 30% intangible as described in Computer software on of the property’s depreciable basis. To figure the deprecia- page 5 in Publication 946. (The cost of some ble basis, you must first multiply the property’s cost or computer software is treated as part of the cost of other basis by the percentage of business/investment use hardware and is depreciated under MACRS.) and then reduce that amount by any section 179 deduction

and certain other deductions and credits for the property. d) Certain nonresidential real property and residenSee What Is the Basis for Depreciation? on page 23 in tial rental property (defined later).

Page 16 Chapter 5 Depreciation
2) It meets the following tests (explained later under Original use test. The original use of the property in the

Tests to be met). Liberty Zone must have begun with you after September

10, 2001. a) Acquisition date test. Used property can be qualified Liberty Zone property if it

b) Placed in service date test. has not previously been used within the Liberty Zone. Also,

additional capital expenditures you incurred after Septem- c) Substantial use test. ber 10, 2001, to recondition or rebuild your property meet

d) Original use test. the original use test if the original use of the property in the

Liberty Zone began with you.

3) It is not excepted property (explained later under Excepted property. The following property does not Excepted property). qualify for the special Liberty Zone depreciation allowance.

• Property eligible for the special depreciation allow- Nonresidential real property and residential rental ance explained earlier in Qualified Property under property. This property is qualifying property only to the Special Depreciation Allowance. extent it rehabilitates real property damaged, or replaces

real property destroyed or condemned, as a result of the • Property required to be depreciated using ADS. This

terrorist attack of September 11, 2001. Property is treated includes listed property used 50% or less in a qualias replacing destroyed or condemned property if, as part of fied business use.

an integrated plan, such property replaces real property • Qualified New York Liberty Zone leasehold improve- included in a continuous area that includes real property ment property (defined earlier in Excepted Property destroyed or condemned. under Special Depreciation Allowance). For these purposes, real property is considered destroyed (or condemned) only if an entire building or structure was destroyed (or condemned) as a result of the Example. In December 2001, you bought and placed in

terrorist attack. Otherwise, the property is considered dam- service in your business in the Liberty Zone the following

aged real property. For example, if certain structural com- property.

ponents of a building (such as walls, floors, or plumbing • New office furniture with a MACRS recovery period fixtures) are damaged or destroyed as a result of the of 7 years. terrorist attack, but the building is not destroyed (or condemned), then only costs related to replacing the damaged • A used computer with a MACRS recovery period of

or destroyed structural components qualify for the special 5 years.

Liberty Zone depreciation allowance. The computer had not previously been used within the

Tests to be met. To qualify for the special Liberty Zone Liberty Zone.

depreciation allowance, your property must meet all of the Because the office furniture is new property, it qualifies following tests. for the special depreciation allowance, but not the special

Acquisition date test. You must have acquired the Liberty Zone depreciation allowance. Because the comproperty by purchase after September 10, 2001, and there puter is used property that had not previously been used in

must not have been a binding written contract for the the Liberty Zone, it qualifies for the special Liberty Zone

acquisition in effect before September 11, 2001. depreciation allowance, but not the special depreciation

For information on the acquisition of property by allowance.

purchase, see Property Acquired by Purchase on page 15

of Publication 946. Election Not To Claim the Liberty Zone Property you manufacture, construct, or produce for Allowance your own use meets this test if you began the manufacture,

construction, or production of the property after September You can elect not to claim the special Liberty Zone depre- 10, 2001. ciation allowance for qualified property. If you make this

Placed in service date test. Generally, the property election for any property, it applies to all property in the

must be placed in service for use in your trade or business same property class placed in service during the year. To

or for the production of income before January 1, 2007 make this election, attach a statement to your return indi-

(January 1, 2010, in the case of qualifying nonresidential cating you elect not to claim the allowance and the class of

real property and residential rental property). property for which you are making the election.

If you sold property you placed in service after Septem- When to make the election. Generally, you must make ber 10, 2001, and you leased it back within 3 months after the election on a timely filed tax return (including exten- the property was originally placed in service, the property sions) for the year in which you place the property in is treated as placed in service no earlier than the date it is service. used under the leaseback. However, if you timely filed your return for the year

Substantial use test. Substantially all use of the prop- without making the election, you can still make the election

erty must be in the Liberty Zone and in the active conduct by filing an amended return within 6 months of the due date

of your trade or business in the Liberty Zone. of the original return (not including extensions). Attach the

Chapter 5 Depreciation Page 17
election statement to the amended return. At the top of the Example 1. In 2002, you place in service in your busielection statement, write “Filed pursuant to section ness, which is in the Liberty Zone, qualified property (de301.9100–2.” fined earlier) costing $25,000. Because this cost is less

than $35,000, the dollar limit on the section 179 deduction Revoking an election. Once you elect not to deduct the is increased by $25,000 to $49,000 ($24,000 + $25,000). special Liberty Zone depreciation allowance for a class of

property, you cannot revoke the election without IRS con- Example 2. In 2002, you place in service in your busi- sent. A request to revoke the election is subject to a user ness, which is in the Liberty Zone, qualified property (de- fee. fined earlier) costing $75,000. Because $35,000 is less

Returns filed before June 1, 2002. The rules that apply than the cost of the property you place in service, the dollar

to the special depreciation allowance discussed earlier in limit on the section 179 deduction you can claim is inRules for Returns Filed Before June 1, 2002 under Special creased by $35,000 to $59,000 ($24,000 + $35,000). Depreciation Allowance also apply to the special Liberty

Zone depreciation allowance.

Reduced Dollar Limit

Increased Section 179 Deduction Generally, you must reduce the dollar limit for a year by the

cost of qualifying section 179 property placed in service in Under section 179 of the Internal Revenue Code, you can the year that is more than $200,000. However, if the cost of choose to recover all or part of the cost of certain qualifying your Liberty Zone property exceeds $200,000, you take property, up to a limit, by deducting it in the year you place into account only 50% (instead of 100%) of the cost of the property in service. For tax years beginning in 2000, qualified property placed in service in a year. that limit was $20,000. For tax years beginning in 2001 and

2002, that limit is generally $24,000. If the cost of qualifying Example. In 2002, you place in service in your busi- section 179 property placed in service in a year is over ness, which is in the Liberty Zone, qualified property cost- $200,000, you must reduce the dollar limit (but not below ing $460,000. Your increased dollar limit is $59,000 zero) by the amount of the cost over $200,000. ($35,000 + $24,000). Because 50% of the cost of the

property you place in service ($230,000) is $30,000 more

Increased Dollar Limit than $200,000, you must reduce your $59,000 dollar limit

to $29,000 ($59,000 − $30,000). The dollar limit on the section 179 deduction is increased

for certain property placed in service in the Liberty Zone.

The increase is the smaller of the following amounts. Recapture Rules

• $35,000. Rules similar to those explained on page 20 of Publication

946 under When Must You Recapture the Deduction? • The cost of section 179 property that is qualified apply with respect to any qualified property you stop using Liberty Zone property placed in service during the in the Liberty Zone. year.

If you use the revised 2001 Form 4562 (dated Returns Filed Before June 1, 2002

March 2002) for a tax year beginning in 2000, you CAUTION must reduce the section 179 dollar limit to If you filed a return before June 1, 2002, and did not deduct !

the increased section 179 amount for qualified property $20,000 before adding the additional amount for qualified

property. placed in service after September 10, 2001, you can deduct the increased amount by filing an amended return by

Qualified property. To qualify for the increased section the due date (not including extensions) of the return for the

179 deduction, your property must be section 179 property year after the year the property was placed in service. This

rule applies to returns for the following years. that is either:

• Qualified Liberty Zone property, or • 2000 fiscal years that end after September 10, 2001.

• Property that would be qualified Liberty Zone prop- • 2001 calendar and fiscal years.

erty except that it is eligible for the special depreciation allowance. On the amended return, write “Filed Pursuant to Rev.

Proc. 2002–33.” Qualified Liberty Zone property is explained earlier in Qualified Liberty Zone Property under Special Liberty Zone

Depreciation Allowance. Property eligible for the special Liberty Zone Leasehold Improvement

depreciation allowance is explained earlier in Qualified Property Property under Special Depreciation Allowance. For information on the requirements that must be met for property Qualified Liberty Zone leasehold improvement property

to qualify for the section 179 deduction, see What Property (described earlier in Qualified Property under Special DeQualifies? on page 14 of Publication 946. preciation Allowance) is 5-year property. This means that it

Page 18 Chapter 5 Depreciation
is depreciated over a recovery period of 5 years. For hold improvement property placed in service during the tax

information about recovery periods, see Which Recovery year as 5-year property using the straight line method, you

Period Applies? on page 23 of Publication 946. should file an amended return before you file your return

The straight-line method must be used with respect to for the year after the year the property was placed in

qualified Liberty Zone leasehold improvement property. service.

Under ADS, the recovery period for qualified Liberty

Zone leasehold improvement property is 9 years. • Your 2000 fiscal year return (for a 2000 fiscal year

that ends after September 10, 2001).

• Your 2001 calendar or fiscal year return. Returns Filed Before June 1, 2002

On the amended return, write “Filed Pursuant to Rev. If you filed either of the following returns before June 1,

2002, and did not depreciate qualified Liberty Zone lease- Proc. 2002–33.”

Table 2. Rules for Returns Filed Before June 1, 2002

Note: This chart highlights the rules for returns affected by the Job Creation and Worker Assistance Act of

2002 that were filed before June 1, 2002, without accounting for any of the new benefits under the law. See

the text for definitions and examples. Do not rely on this chart alone.

IF you want to... THEN you... BY...

claim the special depreciation • must file an amended return • the due date (not including

allowance or special Liberty Zone extensions) of your return for the year

depreciation allowance after the year the property was placed

in service, or

• must file Form 3115, Application for • the due date (including extensions)

Change in Accounting Method, with of your return for the year after the

your return for the year after the year year the property was placed in

the property was placed in service service, and

• must file a copy of your completed • the date you file the original Form

Form 3115 with the IRS National 3115 with your return for the year

Office after the year the property was placed

in service.

elect not to claim the special • must have filed your return timely

depreciation allowance or the special for the year the property was placed

Liberty Zone depreciation allowance1 in service, and

• must file an amended return stating • the date that is 6 months after the

you are not claiming the allowance due date of the original return (not

including extensions).

deduct the increased section 179 • must file an amended return • the due date (not including

amount extensions) of your return for the year

after the year the property was placed

in service.

use a 5-year recovery period for • should file an amended return • the date you file your return for the

depreciating qualified Liberty Zone year after the year the property was

leasehold improvement property placed in service.

1See also Deemed election under Rules for Returns Filed Before June 1, 2002, earlier.

Chapter 5 Depreciation Page 19
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should contact your Taxpayer Advocate.

The Taxpayer Advocate represents your interests and • Ordering forms, instructions, and publications. Call

concerns within the IRS by protecting your rights and 1–800–829–3676 to order current and prior year resolving problems that have not been fixed through nor- forms, instructions, and publications. mal channels. While Taxpayer Advocates cannot change

the tax law or make a technical tax decision, they can clear • Asking tax questions. Call the IRS with your tax

up problems that resulted from previous contacts and questions at 1–800–829–1040.

ensure that your case is given a complete and impartial • TTY/TDD equipment. If you have access to TTY/ review. TDD equipment, call 1–800–829–4059 to ask tax

To contact your Taxpayer Advocate: questions or to order forms and publications.

• Call the Taxpayer Advocate at 1–877–777–4778. • TeleTax topics. Call 1–800–829–4477 to listen to

• Call the IRS at 1–800–829–1040. pre-recorded messages covering various tax topics.

• Call, write, or fax the Taxpayer Advocate office in

your area. Evaluating the quality of our telephone services. To

ensure that IRS representatives give accurate, courteous, • Call 1–800–829–4059 if you are a TTY/TDD user. and professional answers, we evaluate the quality of our

telephone services in several ways. For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS. • A second IRS representative sometimes monitors

live telephone calls. That person only evaluates the Free tax services. To find out what services are avail- IRS assistor and does not keep a record of any able, get Publication 910, Guide to Free Tax Services. It taxpayer’s name or tax identification number.

contains a list of free tax publications and an index of tax

topics. It also describes other free tax information services, • We sometimes record telephone calls to evaluate

IRS assistors objectively. We hold these recordings including tax education and assistance programs and a list

of TeleTax topics. no longer than one week and use them only to measure the quality of assistance. Personal computer. With your personal computer and modem, you can access the IRS on the • We value our customers’ opinions. Throughout this

year, we will be surveying our customers for their Internet at www.irs.gov. While visiting our web opinions on our service. site, you can:

• Find answers to questions you may have. Walk-in. You can walk in to many post offices, • Download forms and publications or search for forms libraries, and IRS offices to pick up certain forms, and publications by topic or keyword. instructions, and publications. Some IRS offices,

• View forms that may be filled in electronically, print libraries, grocery stores, copy centers, city and county

the completed form, and then save the form for re- governments, credit unions, and office supply stores have

cordkeeping. an extensive collection of products available to print from a

CD-ROM or photocopy from reproducible proofs. Also, • View Internal Revenue Bulletins published in the last some IRS offices and libraries have the Internal Revenue

few years. Code, regulations, Internal Revenue Bulletins, and Cumu-

• Search regulations and the Internal Revenue Code. lative Bulletins available for research purposes.

• Receive our electronic newsletters on hot tax issues

and news.

• Get information on starting and operating a small

business.

Page 20 Chapter 6 How To Get Tax Help
Mail. You can send your order for forms, instruc- CD-ROM. You can order IRS Publication 1796,

tions, and publications to the Distribution Center Federal Tax Products on CD-ROM, and obtain:

nearest to you and receive a response within 10

workdays after your request is received. Find the address • Current tax forms, instructions, and publications. that applies to your part of the country.

• Prior-year tax forms and instructions. • Western part of U.S.:

Western Area Distribution Center • Popular tax forms that may be filled in electronically,

Rancho Cordova, CA 95743–0001 printed out for submission, and saved for recordkeeping. • Central part of U.S.:

Central Area Distribution Center • Internal Revenue Bulletins.

P.O. Box 8903

Bloomington, IL 61702–8903 The CD-ROM can be purchased from National Technical Information Service (NTIS) by calling • Eastern part of U.S. and foreign addresses: 1–877–233–6767 or on the Internet at www.irs.gov. The Eastern Area Distribution Center first release is available in mid-December and the final P.O. Box 85074 release is available in late January. Richmond, VA 23261–5074 IRS Publication 3207, Small Business Resource Guide,

is an interactive CD-ROM that contains information important to small businesses. It is available in mid-February.

You can get a free copy by calling 1–800–829–3676 or

visiting the IRS web site at www.irs.gov.

Chapter 6 How To Get Tax Help Page 21
Index

1 E New York Liberty Zone:

403(b) plans ..................8 Election: Area defined . . . . . . . . . . . . . . . 16

Deemed not to claim special Leasehold improvement

allowance . . . . . . . . . . . . . . . 15 property . . . . . . . . . . . . . . . . . 18

A Not to claim special Section 179 deduction . . . . . . . . 18

Accounting methods ............5 allowance . . . . . . . . . . . . . . . 15 Special depreciation . . . . . . . . . 16

Acquisition date: Tax incentives Not to claim special Liberty ...............5

Special depreciation Zone allowance . . . . . . . . . . . 17 Work opportunity credit ........6

allowance . . . . . . . . . . . . . . . 14 Electric vehicle ................6 NOLs . . . . . . . . . . . . . . . . . . . . . 3, 5

Special Liberty Zone Nonaccrual-experience method . . . 5 Eligible educator ...............3

depreciation allowance . . . . . 17 Estimated tax payments .........2 Nonresidential real property . . . . . 17

Annuities, tax-sheltered 403(b) Excepted property: plans ......................8 Special depreciation P Assistance (See Tax help) allowance . . . . . . . . . . . . . . . 14 Passenger automobile, limit on . . . 16 Automobile (See Passenger Special Liberty Zone Pension plan startup costs .......6 automobile) depreciation allowance . . . . . 17 Placed in service date ...... 14, 17

Plans, tax-sheltered annuities,

B F 403(b) plans ................8

Bonds: Foreign missionaries ...........8 Publications (See Tax help)

New York Liberty .............5 Form 1099 ...................5

Qualified zone academy .......5 Free tax services . . . . . . . . . . . . . 20 Q

Qualified leasehold

C H improvement property,

Car (See Passenger automobile) Help (See Tax help) defined . . . . . . . . . . . . . . . . . . . 14

Car expenses .................9 Qualified Liberty Zone

leasehold improvement Catch-up contributions, 403(b) ....8 I property . . . . . . . . . . . . . . . . . . 14 Child and dependent care ........4 Indian employment credit ........7 Qualified property: Church employees and ministers . . 8 Indian reservations, depreciation Increased section 179 Clean-fuel vehicle ..............6 rules ......................7 deduction . . . . . . . . . . . . . . . 18 Comments ...................2 IRAs ........................8 Special depreciation Credit: allowance . . . . . . . . . . . . . . . 13

Child and dependent care ......4 L Special Liberty Zone

Credit for pension plan startup . . 6 depreciation allowance . . . . . 16 Leasehold improvement Electric vehicles .............6 property, defined . . . . . . . . . . . . 14 Qualified zone academy bonds ....5

Indian employment ...........7 Liberty Zone leasehold improvement Renewable electricity property: R production ................6 Defined . . . . . . . . . . . . . . . . . . . 14 Recapture, section 179 Welfare-to-work .............6 Depreciated as 5-year deduction . . . . . . . . . . . . . . . . . 18 Work opportunity .............6 property . . . . . . . . . . . . . . . . . 18 Renewable electricity ...........6 Returns filed before June 1, Residential rental property . . . . . . 17 2002 . . . . . . . . . . . . . . . . . . . 19 D Rollovers, 403(b) plans ..........8 Liberty Zone property: Deduction limit, automobile . . . . . . 16 Increased section 179 dollar Deemed IRAs .................8 limit . . . . . . . . . . . . . . . . . . . . 18 S

Depletion ....................6 Reduced section 179 dollar Section 1256 contracts ..........3

Depreciation: limit . . . . . . . . . . . . . . . . . . . . 18 Section 179 deduction:

New property ...............6 Increased dollar limit for

Property on reservations .......7 M Liberty Zone property . . . . . . . 18

Special depreciation Reduced dollar limit for Marginal production ............6 allowance . . . . . . . . . . . . . . . 13 Liberty Zone property . . . . . . . 18 More information (See Tax help) Special Liberty Zone Returns filed before June 1,

depreciation allowance . . . . . 16 2002 . . . . . . . . . . . . . . . . . . . 18

Supplement to Publication Simplified employee pensions N

946 . . . . . . . . . . . . . . . . . . . . 13 Net operating losses . . . . . . . . . . 3, 5 (SEPs) ....................8

Page 22
Special depreciation allowance: Returns filed before June 1, W

Election not to claim . . . . . . . . . 15 2002 . . . . . . . . . . . . . . . . . . . 18 Wash sale rules ...............3

Excepted property . . . . . . . . . . . 14 Tests for qualification . . . . . . . . 17 Welfare-to-work credit ..........6

Qualified property . . . . . . . . . . . 13 Substantial use, special Liberty Withholding ..................2 Requirements for claiming . . . . . 13 Zone depreciation allowance . . . 17 Work opportunity credit ..........6 Returns filed before June 1, Suggestions ..................2

2002 . . . . . . . . . . . . . . . . . . . 15

Tests for qualification . . . . . . . . 14 Y T

Special Liberty Zone depreciation Years of service, church Tax help . . . . . . . . . . . . . . . . . . . . 20 employees and ministers .......8 allowance: Tax-sheltered annuity plans, Election not to claim . . . . . . . . . 17 403(b) plans ................8 ■ Excepted property . . . . . . . . . . . 17 Taxpayer Advocate . . . . . . . . . . . . 20 Qualified property . . . . . . . . . . . 16

Requirements for claiming Teachers, classroom materials ....3 . . . . . 16

Tests for qualification ....... 14, 17

TTY/TDD information . . . . . . . . . . 20

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